Rest of Asia Seen Gaining, Losing
China is neither the gullible patsy nor the ominous predator it’s been made out to be by supporters and critics of the China trade normalization measure adopted Wednesday by the U.S. House, say Asia-based economists and financial analysts.
In fact, as Beijing prepares to hand over more power to “foreign devils” than at any time since colonialism, its position is far more complex and its interests more varied and even contradictory than the Washington debate suggests.
These events are a milestone in the evolution of modern China and promise change--good and bad--for the rest of Asia as well.
The House action, now expected to be duplicated by the Senate, paves the way for a trade agreement with the United States that appears to favor Uncle Sam. It will be followed by China’s admission to the World Trade Organization, which will also tend to undermine Beijing’s control.
Why would China’s leadership head down this path? Because China has run out of alternatives, analysts say, as it surveys the success of its global competitors, the failure of its past policies and a growing list of domestic problems. Essentially, the regime is making a high-stakes bet that it can remain in power by giving away power.
Decades spent trying to prop up the state sector have failed, weakening the banking system and undercutting economic growth even as the number of angry, frustrated workers without a job continues to grow.
Mounting party corruption and a jaundiced view of communist ideology these days has left President Jiang Zemin and Premier and economic czar Zhu Rongji convinced that more foreign capital and technology feeding an increasingly vibrant private sector is the only way to mop up the unemployed, raise living standards and prolong their legitimacy.
“If they continued their traditional approach, they could see growth deteriorate faster, jeopardizing their power base,” said Thomas Chan, head of the China Business Center at Hong Kong Polytechnic University.
“Moving to a WTO system breaks down vested interests in China, creating enormous strain. You’re bringing in the devils to tell you where the problems are,” says Andy Xie, Hong Kong-based economist with Morgan Stanley Dean Witter. “This sort of change has never happened in China before without a revolution.”
Beijing Agrees to Telecom Curbs
The regime’s decision to follow this course has not been easy and comes with a high economic price tag. In a key concession during negotiations with Washington and Brussels, for instance, Beijing agreed to ease ownership and operating restrictions in the telecommunications, Internet and communication sectors. These are critical tools in controlling public opinion.
“This will erode their ability to exercise effective censorship,” Chan said. “But they had to accept it as part of WTO accession.”
China also agreed to let in more food imports. By some calculations this move could put 10 million Chinese farmers in already depressed rural areas out of work as efficient North American and Australian grain, meat and other producers gain market share.
And by agreeing to join a rule-based system, Beijing is willingly eroding the Communist Party’s power as a force above the law. The global trading system’s sanctions, reciprocal rules and rights promise to chip away over time at arbitrary authority, as principle replaces crude power in the making of key economic decisions.
“Even if the party is above China’s legal system, it’s not above the WTO,” said Robert Broadfoot, managing director of Hong Kong-based Political and Economic Risk Consultancy.
Finally, China opens itself to competition in a host of sectors, from autos to tobacco to wristwatches, as other nations in the 134-member WTO have wrung their own concessions from Beijing in return for blessing its admission to the trade organization. And by liberalizing the insurance and financial sectors, it ensures that domestic players will no longer rely as heavily on the government for resources to grow, weakening its authority.
Still, with or without WTO membership, many of these changes are already happening, albeit more gradually, and the agreement will give Beijing some control over the pace and direction of reforms. That follows because Beijing will have several years to phase in promised changes.
Power Realignment Gains Impetus
Membership also gives Beijing greater access to important foreign markets in such areas as textiles and manufactured goods, and provides some guarantee that Washington cannot suddenly slam shut its borders after some political or human rights crisis.
For the rest of Asia, China’s full membership in the global trading system furthers a realignment of power across the region as the Chinese economy begins to rival Japan’s in size.
But by and large, China’s Asian neighbors are greeting these developments with relief.
The most vulnerable under the new order is Indonesia, followed by the Philippines and Thailand. These countries most directly compete with the Asian giant in such labor-intensive, relatively low-margin industries as textiles and footwear.
As China expands its access to the world’s wealthy markets and attracts more foreign investment through its improved legal safeguards, its three Southeast Asian neighbors could find their relative position slipping. “China is coming up fast, it is hungrier and has a lot more people looking for work,” says Morgan Stanley’s Xie.
This will put pressure on the three to cut costs and improve efficiency and possibly spur Indonesia’s move into electronics assembly industries.
The biggest short-term winner from WTO entry, meanwhile, will be Hong Kong. Further liberalization in China will boost the demand for its legal, accounting, design, financial and consulting services while growing trade volumes should spur its shipping and logistics business.
Paradoxically, however, a more open Chinese market will, over the longer term, diminish Hong Kong’s relative importance as China opens up and develops many of these industries itself. “Over time, Hong Kong will have to reinvent itself,” said Robert Subbaraman, Asia analyst for Lehman Brothers.
Also high in the victory column will be Taiwan. At the most basic level, China’s entry will pave the way for Taiwan’s own entry, long delayed on political grounds. Membership for Taipei will expand its access to global markets, including mainland China’s, and provide some security that Beijing cannot turn around during a political crisis and nationalize its substantial mainland investments.
Dual membership also promises long-term political dividends as the two are forced to concentrate on areas of common interest, thereby reducing any temptation to lob missiles across the Taiwan Strait. “Having Taiwan and China in the same global organization is one more stabilizing factor,” said Guonan Ma, North Asian economist with Merrill Lynch.
Many players in the region, such as South Korea, Malaysia and Singapore, meanwhile, can expect growing competition from China on the lower-cost end of their information technology industries.
Factories that assemble computer monitors, for instance, are increasingly vulnerable. This should encourage them to migrate into higher-value industries. That said, a more open Chinese market should raise demand for their components, albeit in strong competition with the Japanese at the higher end.
Finally, the big Japanese consumer market--like those in Europe and North America--can expect higher imports as a result of China’s entry. But Asia is betting that the opening up of the Chinese market, and the stabilizing effects of China’s integration into the global economy, will more than offset any job-threatening import surges.
